Global recovery fears hit banks as they lead the FTSE lower

CONCERNS over Europe’s debt crisis and the global economy sent Britain’s top shares sharply lower yesterday, leaving investors anxious for a strong earnings season to kick-start further buying of equities.

The UK benchmark index ended down 61.42 points or one per cent at 5,929.16, its lowest close since 29 June, extending a 1.1 per cent drop from the previous session when a dismal US jobs report dented optimism that the economy was coming out of a soft patch.

Banks, typically large holders of European government debt, weighed heavily on the index on fears Italy could be the next casualty of the Eurozone debt crisis, and after reports that said some European Union leaders were considering allowing a selective default by Greece.

The cost of insuring Italian debt against default jumped to a record high.

“It’s another risk-off day continuing from Friday where obviously the payrolls are still figuring on everyone’s minds, and then you’ve got deep concerns towards Italy potentially being dragged into the sovereign debt crisis as well,” Joshua Raymond, market strategist at City Index, said.

The FTSE 100 volatility index, a barometer of investor anxiety, jumped 18.6 per cent, its biggest one-day percentage gain since mid-April. The higher the index, the lower investors’ appetite for risky assets such as stocks.

As investors shunned riskier assets, miners bore the brunt of the sell-off, tracking steep declines in metals prices.

Michael Hewson, market analyst at CMC Markets, pointed to 5,860 – the February and April lows – as the next key support level for the FTSE 100, with events to watch for including Chinese second-quarter GDP figures, due for release mid-week.

“The FTSE is very commodity-driven and even though banks are a big part of (the FTSE), it is going to be insulated a little bit from any financial fallout ... If you get a slowdown in China, then you might see some fireworks.”

BSkyB fell 4.6 per cent to 693.7p in high volume, as the phone hacking scandal engulfing Rupert Murdoch’s News Corp threatened to derail its planned takeover of the British satellite broadcaster.

“We believe the deal is all but dead,” Panmure Gordon said in a note, while cutting its target price for the stock and repeating its “hold” recommendation.

Goldman Sachs, however, upgraded its rating for BSkyB to “buy”, arguing the share price falls had presented an attractive entry point into a company whose long-term fundamentals remain strong.

On the upside, International Power firmed 2.6 per cent after last week’s six per cent fall as an Australian carbon tax proved fairly benign for the power generator, according to Espirito Santo Investment Bank.

“Markets are very reluctant to want to give up a lot of ground, but equally they just haven’t got the wherewithal yet to advance to new and higher ground,” Mike Lenhoff, market strategist at Brewin Dolphin, said.

“If the earnings come through and are at least as good as expected, and there’s more progress being made on resolving the Greek situation and any related kind of sovereign debt issue, then it seems to me as if the markets could actually move into higher ground.”